Public Bodies and VAT

Douglas Chapman Excerpts

Wednesday 17th May 2023 Westminster Hall

[Douglas Chapman (Dunfermline and West Fife) (SNP)]

It is a pleasure to serve under your chairmanship, Mr Betts. I thank the right hon. Member for Camborne and Redruth (George Eustice) for securing this important debate. I think we all want an active, high-skill economy that further education colleges play a leading role in developing, not just in his constituency and south-east England, but across the UK.

I start by talking about some of the general issues we have experienced in Scotland with regard to VAT. The SNP’s 2021 manifesto said:

“A re-elected SNP Government will use the fiscal framework review to push for an urgent increase to Holyrood’s devolved financial powers, including…Strengthening…Scotland’s tax powers with the devolution of VAT, and full powers over income tax and National Insurance contributions.”

I can imagine Treasury Ministers squirming at that potential change in taxation across the UK. VAT is a huge part of the UK’s tax income, and it is forecast to raise £162 billion in this financial year. Only income tax and national insurance contributions raise more; income tax accounts for £268 billion, and the three represent two thirds of total tax receipts across the UK. We are talking about massive sums of money. Compared with the massive income that comes in through VAT, the right hon. Member for Camborne and Redruth is asking for a tiny speck of financial support for FE colleges.

The Office for Budget Responsibility notes that around half of household expenditure is subject to VAT at the 20% rate, and around 3% of expenditure is subject to the 5% rate. Although public bodies may account for VAT on supplies, goods and services, like any other business, they often make the point that their non-business activities can be outwith the scope of VAT.

HMRC’s guidance for local authorities and other public bodies says that the general rule is:

“where a public body is funded by way of public expenditure…to do something for the public good, it’s unlikely to be engaging in business activities for VAT purposes.”

That definition should include FE colleges, as the right hon. Member for Camborne and Redruth has said. Public bodies such as Government Departments, non-departmental public bodies, NHS bodies, local government, the police and fire and rescue services should all fall within that scope. VAT incurred in the course of non-business activities is not generally recoverable, although special provision is made for local authorities and certain other specified bodies to recover that VAT. I believe that what the right hon. Member is promoting this morning fits with Treasury rules. It even fits with previous EU rules. Indeed, VAT was introduced under the auspices of the European Commission, and public bodies are generally not regarded as taxable persons under EU VAT law for most of their activities.

When it comes to VAT on FE colleges, we in Scotland feel the pain of the right hon. Member for Camborne and Redruth. The Tories’ dreadful and shameful treatment of Police Scotland and Scottish fire and rescue services cannot be forgotten. In 2011, the Scottish Tories campaigned to unify the police forces into a single force, supporting SNP policy at the time. However, after that happened, the UK Treasury refused to extend to Scotland’s police service, operating under its new name, the same VAT exemptions that it had had for many years prior to the change. The same was true when Scottish fire and rescue services were amalgamated into a single body. Despite emergency services in England having relief from VAT, the UK Government failed to deliver the same relief for Police Scotland and the Scottish Fire and Rescue Service. That cost Scottish taxpayers more than £175 million over five years.

In 2013, when the services were formed, right through to 2017 when the then Chancellor of the Exchequer, Philip Hammond, finally caved in, in the Budget, those emergency services paid around £170 million in VAT. Maybe this Minister and this Chancellor can also cave in and give that right to England’s FE colleges.

Many hon. Members from across the House will remember my former colleague Roger Mullin, who campaigned on this throughout his time in Parliament. It is a shame that there was not immediate action from the UK Government to make sure that the Scottish Fire and Rescue Service and Police Scotland were not disadvantaged. However, it has to be said that 318 Tory MPs, including the right hon. Member for Camborne and Redruth, voted on 26 October 2015 against Roger’s amendment to remove VAT from those vital services in Scotland. I regard that as a shameful act. We had to find £170 million in the Scottish budget to make up the difference. That shows that we got through and won the argument eventually, and that SNP MPs stand up for Scotland. Perhaps something similar can be said of the right hon. and hon. Members with us today from the Conservative party: they are standing up for England’s FE colleges.

The controls that Westminster retains over devolution are still quite strong. We cannot know with certainty that future decisions will not disadvantage Scotland again. For example, we do not know whether the national care service, which is being introduced in Scotland as we speak, will be VAT-exempt. I hope we get clarity from the Minister this morning on that.

The right hon. Member for Camborne and Redruth talks about the FE sector, and the uneven playing field when it comes to VAT. We in Scotland could say, “Welcome to our world,” because we have lots of experience of that. I have great sympathy with his arguments. As I said at the start, FE colleges support skills, young people, small and medium-sized enterprises and, above all, exports. Those are areas we cannot ignore. We should try to give FE colleges every single advantage that we can, so that they can train more people, and work more closely with small businesses across different parts of the country. FE colleges are a critical building block of successful high-skill economies. I hope that the Minister will support the right hon. Member’s ambitions, and also ensure that VAT is devolved from the Treasury to other Parliaments across the UK.